RiskJanuary 8, 2020

Texas ERS Could Become Insolvent 20 Years Earlier than Previously Anticipated

An actuarial valuation report cites the plan’s risk of going insolvent by 2075.

Reported by Steffan Navedo-Perez

The Texas Employees Retirement System (ERS) faces a “strong possibility” of becoming completely insolvent in 40 years if it does not work to correct issues facing the fund, according to an actuarial valuation report commissioned with reviewing the system’s health.

“The current financial outlook for ERS is very poor. It is important to understand that the currently scheduled contributions are not expected to accumulate sufficient assets in order to pay all of the currently scheduled benefits when due. Based on current expectations and assumptions, ERS is projected to remain solvent until the year 2075,” the report, prepared by GRS Retirement Consulting, stated.

“However, based on volatility in the financial markets, there is a strong possibility that ERS will become insolvent in a 30- to 40-year timeframe, which is within the current generation of members. Contributions must materially increase in the next legislative session to secure the benefits for current members.”

The report studied the volatile effects of the market and concluded that given current volatility projections, there is a 40% chance that the pension can become insolvent by 2060, and a 25% chance of becoming insolvent by 2050.

“Given this outlook, we recommend the legislature increase the contribution rates to ERS,” the report said. “Each successive biennium that ERS receives the currently scheduled contribution rates, the unfunded actuarial accrued liability is projected to increase by approximately $1.0 billion.” The state contributes 9.5% of gross payroll, agencies contribute 0.5%, and system members contribute 9.5% of their salaries towards the pension.

The legislature was considering appropriating $150 million to ERS in a previous session, but the funds were used for other priorities, such as public education spending and property tax relief.

“Addressing the pension liabilities now will cost the state much less than if it waits to do it later,” ERS spokeswoman Mary Jane Wardlow said, according to the Statesman. She attributed “past market volatility and insufficient contributions to the fund” for the pension’s declining health. The pension’s assets are expected to return 7.5% per year.

If the pension goes bust, the ERS’ funding will have to revert to a “pay-as-you-go” status, which would mandate the legislative appropriation for ERS to immediately quadruple, the report warns.

The fund earlier this year took initiative to configure its strategic asset allocation, altering the parameters under which many of its private markets allocations must adhere to.